Subprimes and such

[bid_em_up]

I work on the same principle. I recently bought a car, this was my first big investment. But only after I got the corresponding job to be able to finance said car.

I will assume you did not mean this the way it reads.

 

A car is not an investment (unless it is some sort of classic/antique vehicle).

 

A car is liability (until that loan is fully paid off). And even after its paid off, it has depreciated in value and will usually continue to do so with the passage of time.

 

An investment is an asset that (hopefully) will appreciate in time.

[joshs]

Defaults typically occur when two conditions are met:

a. The person has negative equity (owes more than the home is worth)

b. The person is unable to make payments

 

Condition a is a logical necessity since if your home is worth more than what you owe and you are "considering" defaulting you have a choice between

1. defaulting, getting nothing and having your credit rating ruined

or

2. selling the home, collecting the difference between what the home is worth and what you owe, and preserving your credit rating

 

Since 2 is better in all respects then 1 you always choose 2.

 

Now, even if you have negative equity, you still might (rationally) choose to not default if you think the value of your credit rating exceeds the difference between what the home is worth and what you owe.

 

Now as a matter of psychology/ideas about responsibility and so on, most people will not default even if they rationally should (negative equity exceeding value of credit rating), hence condition b is almost a necessity.

 

What happens when home prices drop is that:

the number of people who can't pay stays the same, but out of those, many more of them will meet condition a and not have equity in the home so they have to default since they can't sell.

 

I hope this helps.

 

Note: One of the common scams in recent years is appraisal fraud.

Person A has a home worth 400K

He agrees to sell it to person B for 500K while getting an appraisal saying the home is worth 500K.

Person B gets a loan for 500K (0% down) by a bank who believes the appraisal.

Person A gets paid the 400K

A and B split the 100K.

B skips town and defaults.

(Probably B did this scheme multiple times at the exact same time, so that these transactions did not occur on his credit report)

[bid_em_up]

People who own houses and rent them out, especially those who do it as a business rather than a temporary convenience, will no doubt be inclined to walk away if the house value falls below the mortgage debt. But for the guy who bought a house to live in? Where does he go? If he has a choice, that is if he is able to make his payments on the mortgage, I would expect him to make a rational choice. He has neighbors, his kids go to school, if he keeps paying he will someday own it, etc. It seems to me that the gap between the value of the house and the amount of the mortgage would have to be huge for this to overcome all the reasons that he has to stay put and ride it out.

The person who buys houses and rents them out is usually not bothered by fluctations in the value of the house. He will not be the one walking away from the property. If anything, he will be out buying more properties at the (now) distressed/fire sale prices.

 

People who buy properties for rental purposes, usually will:

 

1) know the market

2) look for houses for sale from people who were already in a distressed situation (divorce, loss of job, bankruptcy, etc.) where the property can already be purchased at 30-50% discount.

3) Is normally more concerned with cash flow (a steady income stream) that pays the mortgage

4) understands that with the passage of time the house will probably reappreciate eventually.

 

He doesn't care if other $200k houses in the area are now selling for $150k, as he most likely purchased his property for $150k initially. He doesn't intend to sell the property (at least not in the near future), but instead to rent it for a long period of time having someone else pay essentially pay the mortgage on that property for him. In the end, he has a house that has been paid for by someone else, all the equity in the home is now his, and he has steady income stream at this point of whatever the rent is.

[pclayton]

Suppose a guy buys a house for $500,000 and there is  a 10% drop in value These figures are pretty realistic these days. In a sense, he can save $50,000 by telling the bank to take this house and shove it. But he has to live somewhere. Even at the height (or depth maybe) of mortgage nonsense I don't think people with foreclosures on their records were finding it easy to get a new mortgage.

My understand is that a fairly significant number of people walked away from their mortages the last time the housing market imploded

 

I suspect that Phil might be in a good position to answer this given his background in real estate (admittedly he does commercial, not residential)

Just because someone faces a paper loss in their home's value doesn't mean they walk from it. On the other hand, it feels 'wrong' to service a loan that greatly exceeds your property's value.

 

Homeowners and lenders face many tough decisions. Banks do not want to ever foreclose. It costs a lot and it is very time consuming. The loan also goes on their default list which gets the bank in hot water with regulators. Please note that I am using 'bank' somewhat euphemistically; it might mean Bear Stearns / EMC Mortgage.

 

Banks are usually willing to reduce the loan amount to get out from under a an upside-down loan, but only after the loan is in default. Usually banks will not reduce the principal unless there is a pay-off involved. Furthermore, lowering the principal amount results in phantom taxable income to the borrower.

 

We bought our 1st home in 1992 during the last down cycle from a company that held the 2nd TD on a property and foreclosed. In this case, it was very unusual since the 2nd greatly exceeded the 1st TD. The company had to come out of pocket every month to pay the 1st and the property taxes to keep their position intact. They really wanted to make a deal, so we bought the home for about 30% off its peak value and for about 3% down. I even pulled a 'cram-down' a few years later - where the bank restructured the mortgage because I sure as hell wasn't going to service a debt for more than the property's value.

 

Luckily we sold our home 18 months ago and we are now renting, but we pulled out at a good time. I'm waiting for the market to come back, but unfortunately my job was a casualty of this market and I'm looking for another.

 

In certain areas, this market will continue to be a bloodbath. The California central valley and places in Florida will have depression-type conditions for awhile.

 

Where I live, its just too desirable of a place for values to stay down for too long. Affordable or not, LA / Orange County is still the place many people want to live, and the economy will not feel the swings as much.

 

1997-2005 was a white hot market in many places. You'll see plenty of adjustments.

 

What I tell people is that the market will suck for at least another 12 months (we are in our 25th month of a decline currently). Check with me in early 2009. I think many things could happen that may brighten the outlook, like a change in the White House, situation in Iraq, etc..

[pclayton]

I that's true isn't it wort it to lose your house and buy it on the auction?

Gerben mentioned the mayor reason.

 

And depending on the laws, the bank will

get the house and sell it, but this does not

mean (!), that you got rid of your complete

loan, at least in Germany you still owe the

bank the missing money, ...

unless you declare your self bancrupt, which

requires that you make your finnacial situation

public, and you are under surveilance for a

couple of years.

 

With kind regards

Marlowe

 

PS: And of course you may not get your house

back at a cheap price.

Afterall an auction is open to all.

It doesn't work this way in the US.

 

There are two types of foreclosures: Judicial and Non-Judicial.

 

A Non-Judicial foreclosure is used in 99% of the cases. The property is put on the auction block and the bank can bid up to the value of its loan + costs. It is a relatively quick process - 4-5 months, but the bank can't go back after the borrower for any shortage. The property is the only security for the loan, the bank can't go back and get a 'default judgment'. If after the property sells and the bank still hasn't collected its loan, its SOL.

 

Rarely, the bank will have a huge shortfall, and the borrower will have a significant financial statement where it pays to go back and get a judgment for the balance. This assumes the loan documents allow it, and the borrower has something to go after. It is also a much slower process, since the 'judicial' foreclosure doesn't get any priority on the court calendar, so it can take 18 months or so.

[joshs]

People who own houses and rent them out, especially those who do it as a business rather than a temporary convenience, will no doubt be inclined to walk away if the house value falls below the mortgage debt. But for the guy who bought a house to live in? Where does he go? If he has a choice, that is if he is able to make his payments on the mortgage, I would expect him to make a rational choice. He has neighbors, his kids go to school, if he keeps paying he will someday own it, etc. It seems to me that the gap between the value of the house and the amount of the mortgage would have to be huge for this to overcome all the reasons that he has to stay put and ride it out.

The person who buys houses and rents them out is usually not bothered by fluctations in the value of the house. He will not be the one walking away from the property. If anything, he will be out buying more properties at the (now) distressed/fire sale prices.

 

People who buy properties for rental purposes, usually will:

 

1) know the market

2) look for houses for sale from people who were already in a distressed situation (divorce, loss of job, bankruptcy, etc.) where the property can already be purchased at 30-50% discount.

3) Is normally more concerned with cash flow (a steady income stream) that pays the mortgage

4) understands that with the passage of time the house will probably reappreciate eventually.

 

He doesn't care if other $200k houses in the area are now selling for $150k, as he most likely purchased his property for $150k initially. He doesn't intend to sell the property (at least not in the near future), but instead to rent it for a long period of time having someone else pay essentially pay the mortgage on that property for him. In the end, he has a house that has been paid for by someone else, all the equity in the home is now his, and he has steady income stream at this point of whatever the rent is.

Well, sometimes its hard to tell the difference between someone who initially intends on using the property to generate rental incomes vs a flipper (someone who intends on reselling the property as fast as possible).

 

But having said that, there are very few individuals who buy a property only for rental purposes these days because property values in most of the US currently are so high that the mortgage payments exceed (and often by a lot) the rental value of the home (also note you will have vacancy's some % of the time and you have maintainance costs, so you need to be making a significant profit the rest of the time to make up for those factors). Thus even the renters are usually just spectulating on the housing market, while trying to reduce there costs by renting out in the mean time. Basically they are betting that the gains from HPA make up from the losses from renting.

 

see: http://www.housingtracker.net/affordability/

for median rent to mortgage payment ratios for major US metropolitan regions.

 

The other thing to note, is if someone wants to buy multiple properties to rent (or buy an apartment building to rent) they usually set up a Limited Liability Company so that they can default if there equity goes negative without any consequences for themselves.

[Echognome]

You don't have to cover your mortgage to make a profit, because you are still building equity. However, I agree there are additional costs involved. You will want some insurance on the building (or unit), all maintenance, and if your tenant doesn't pay the rent, guess what, it's a pain in the butt to evict.

 

As far as cities where the rent is high compared to owning, I remember Washington, D.C. being the case. (I haven't checked Josh's link.) But think about it. Lots of students, lots of foreign diplomats. That means people wanting to live there temporarily.

[joshs]

I that's true isn't it wort it to lose your house and buy it on the auction?

Gerben mentioned the mayor reason.

 

And depending on the laws, the bank will

get the house and sell it, but this does not

mean (!), that you got rid of your complete

loan, at least in Germany you still owe the

bank the missing money, ...

unless you declare your self bancrupt, which

requires that you make your finnacial situation

public, and you are under surveilance for a

couple of years.

 

With kind regards

Marlowe

 

PS: And of course you may not get your house

back at a cheap price.

Afterall an auction is open to all.

It doesn't work this way in the US.

 

There are two types of foreclosures: Judicial and Non-Judicial.

 

A Non-Judicial foreclosure is used in 99% of the cases. The property is put on the auction block and the bank can bid up to the value of its loan + costs. It is a relatively quick process - 4-5 months, but the bank can't go back after the borrower for any shortage. The property is the only security for the loan, the bank can't go back and get a 'default judgment'. If after the property sells and the bank still hasn't collected its loan, its SOL.

 

Rarely, the bank will have a huge shortfall, and the borrower will have a significant financial statement where it pays to go back and get a judgment for the balance. This assumes the loan documents allow it, and the borrower has something to go after. It is also a much slower process, since the 'judicial' foreclosure doesn't get any priority on the court calendar, so it can take 18 months or so.

Actually there are two distinctions:

Judicial vs Non-Judicial Forclosures is one

The other is Recourse vs Non-Recourse loans

You sort have combined the two into one idea

 

The standard mortgage contract is a recourse contract. That is you have borrowed $X and have agreed to pay this money back. If you do not, the bank lays claim (holding a lien) to your property and sells it. Giving them your property does not eliminate there claim for $X. If you borrow 200K, and they foreclose, and sell the property for 150K you can still sue for a definciency settlement for the other 50K.

 

Now having said that, this doesn't happen much for two reasons:

1. Most of the western states (including CA) passed laws back in the depression against definciency claims on home mortgages. These laws effectively convert to mortgage contract from a Recourse to a Non-Recourse loans. Note though that these laws really are mostly in the western US.

2. Most people who default don't have any money, so its a waste of time and money (legal costs) to go after them....

 

 

For Judicial vs Non-Judicial see:

http://www.all-foreclosure.com/judicial.htm

 

Its really mostly about the forclosure process (and property auction process) and disposition of the property and not about the debt.

[joshs]

You don't have to cover your mortgage to make a profit, because you are still building equity. However, I agree there are additional costs involved. You will want some insurance on the building (or unit), all maintenance, and if your tenant doesn't pay the rent, guess what, it's a pain in the butt to evict.

 

As far as cities where the rent is high compared to owning, I remember Washington, D.C. being the case. (I haven't checked Josh's link.) But think about it. Lots of students, lots of foreign diplomats. That means people wanting to live there temporarily.

Yes you have to do the calculation carefully, and also include the carrying cost for your down payment (which you could have gotten a tresuary bill or stocks or a CD or whatever with that money).....

 

Let me give a DC example. My friend has a 1200 Sq foot home in Alexandria is currently valued at about 750K.

With 20% down (150K), you would get a mortgage for 600K. Let me assume 7% interest (Jumbo loans have higher interest rates) and we have monrthly payments of $4000/month. Of this $500 is principle, so that part is effectively paid to yourself. Yet you are paying $3500/month in interest plus about 900/month in property taxes and insurance, plus whatever maintaince costs you have.

Further, absent home price appreciation you have tied up $150 in the house instead of getting 5% interest on it which is $7500/year or about $600/month.

 

So even if you are paying $0 mainatance, you need to rent this propery out for $5000 per month to break even. I assure you that the rental values is half that. You might buy the house and rent it out, but you are betting that your equity is increasing by at least an additional $2500 a month do to home prices going up....

 

800 Sq Ft Condos downtown which would rent for $1500-$1800, sell for $400-$500K plus a monthly condo association fee. Just run the math, buying is much more expensive then renting ...

[mike777]

People who own houses and rent them out, especially those who do it as a business rather than a temporary convenience, will no doubt be inclined to walk away if the house value falls below the mortgage debt. But for the guy who bought a house to live in? Where does he go? If he has a choice, that is if he is able to make his payments on the mortgage, I would expect him to make a rational choice. He has neighbors, his kids go to school, if he keeps paying he will someday own it, etc. It seems to me that the gap between the value of the house and the amount of the mortgage would have to be huge for this to overcome all the reasons that he has to stay put and ride it out.

The person who buys houses and rents them out is usually not bothered by fluctations in the value of the house. He will not be the one walking away from the property. If anything, he will be out buying more properties at the (now) distressed/fire sale prices.

 

People who buy properties for rental purposes, usually will:

 

1) know the market

2) look for houses for sale from people who were already in a distressed situation (divorce, loss of job, bankruptcy, etc.) where the property can already be purchased at 30-50% discount.

3) Is normally more concerned with cash flow (a steady income stream) that pays the mortgage

4) understands that with the passage of time the house will probably reappreciate eventually.

 

He doesn't care if other $200k houses in the area are now selling for $150k, as he most likely purchased his property for $150k initially. He doesn't intend to sell the property (at least not in the near future), but instead to rent it for a long period of time having someone else pay essentially pay the mortgage on that property for him. In the end, he has a house that has been paid for by someone else, all the equity in the home is now his, and he has steady income stream at this point of whatever the rent is.

Indeed people are buying homes, renting them out while they try and flip them and then walking away.

Renters/families are then kicked even if they pay the rent on time and in full. This is happening now.

 

The rents never cover the mortgage and taxes for these flippers.

[Echognome]

Let me give a DC example. My friend has a 1200 Sq foot home in Alexandria is currently valued at about 750K.

With 20% down (150K), you would get a mortgage for 600K. Let me assume 7% interest (Jumbo loans have higher interest rates) and we have monrthly payments of $4000/month. Of this $500 is principle, so that part is effectively paid to yourself. Yet you are paying $3500/month in interest plus about 900/month in property taxes and insurance, plus whatever maintaince costs you have.

Further, absent home price appreciation you have tied up $150 in the house instead of getting 5% interest on it which is $7500/year or about $600/month.

 

So even if you are paying $0 mainatance, you need to rent this propery out for $5000 per month to break even. I assure you that the rental values is half that. You might buy the house and rent it out, but you are betting that your equity is increasing by at least an additional $2500 a month do to home prices going up....

 

800 Sq Ft Condos downtown which would rent for $1500-$1800, sell for $400-$500K plus a monthly condo association fee. Just run the math, buying is much more expensive then renting ...

You are missing one important item: income taxes.

 

Yes you have to pay a property tax + insurance, but you work that into your monthly mortgage.

 

Here's a calculation I made for myself.

 

I can put $200k down and get a mortgage on a place for say $3k-$4k/month. If I do that, the govt will basically kick in about $1k/month in tax savings.

 

If I rent instead, I can receive say 5% on my $200k (at zero risk) and rent for say $2k a month. So you'd think by renting I earn lets say just under $1k/mth in interest the other way. But, I now have to pay taxes on the interest I earn! And I'm achieving no equity.

 

So income taxes are really set up for owning rather than renting.

[joshs]

Let me give a DC example. My friend has a 1200 Sq foot home in Alexandria is currently valued at about 750K.

With 20% down (150K), you would get a mortgage for 600K. Let me assume 7% interest (Jumbo loans have higher interest rates) and we have monrthly payments of $4000/month. Of this $500 is principle, so that part is effectively paid to yourself. Yet you are paying $3500/month in interest plus about 900/month in property taxes and insurance, plus whatever maintaince costs you have.

Further, absent home price appreciation you have tied up $150 in the house instead of getting 5% interest on it which is $7500/year or about $600/month.

 

So even if you are paying $0 mainatance, you need to rent this propery out for $5000 per month to break even. I assure you that the rental values is half that. You might buy the house and rent it out, but you are betting that your equity is increasing by at least an additional $2500 a month do to home prices going up....

 

800 Sq Ft Condos downtown which would rent for $1500-$1800, sell for $400-$500K plus a monthly condo association fee. Just run the math, buying is much more expensive then renting ...

You are missing one important item: income taxes.

 

Yes you have to pay a property tax + insurance, but you work that into your monthly mortgage.

 

Here's a calculation I made for myself.

 

I can put $200k down and get a mortgage on a place for say $3k-$4k/month. If I do that, the govt will basically kick in about $1k/month in tax savings.

 

If I rent instead, I can receive say 5% on my $200k (at zero risk) and rent for say $2k a month. So you'd think by renting I earn lets say just under $1k/mth in interest the other way. But, I now have to pay taxes on the interest I earn! And I'm achieving no equity.

 

So income taxes are really set up for owning rather than renting.

The main interest deduction applies when I buy a home and live in it. There are deductions assocaited with second homes (for instance the property tax is deductible, so efectively you are only paying 2/3 of the property tax rate and you can deduct maintance or depreciation ) the rules are slightly different.

 

I think there are deductions assocaited with interest on rental properties, but I am not certain exactly what the current rules are. I beleive its:

If you pay income taxes on the monthly rent you can write off the mortgage interest. So if you want to apply a factor of 2/3 here you can, but you need to apply it to both sides (income from rent * 2/3, and interest on the mortgage*2/3). The accounting here needs to be consistant....

 

 

Now if you are deciding to buy a home for personal use instead of renting, you do need to include the factor of 2/3. So in my DC example, you monthly costs of buying are:

500K paid to your self (so we don't count this)

$3500 in interest (which we multiply by 2/3)

$900 in inurance and property taxes (also deductible so we multiply by 2/3)

+Maintance

+Lost Interest on equity (Downpayment+ the $500/month you are paying to yourself in principle)

 

So this is 2/3*$4400=$3000 +Maintance and Carry Cost

 

This $3000 is more then the rent, so you need enough HPA to make up the difference as well as making up for the carrying cost and maintaince.

 

If you have bought and are renting out the property, like I said, the calculation is similar except that the rental income is taxable (which makes a big difference), so its similar to doing the whole calculation without the taxes modulo a factor of 2/3 on both sides of the equation, if we are just trying to figure out which of income and costs are larger...

[Echognome]

And don't forget capital gains. :rolleyes:

 

It gets tricky when you sell when you are not owner/occupier.

[joshs]

And don't forget capital gains. :rolleyes:

 

It gets tricky when you sell when you are not owner/occupier.

Yeah you need to live in the home for 2 years to avoid paying capital gains taxes on the selling price (although its prorated if you live in the home for part of it) if there is in fact a gain....

[helene_t]

That is something I have difficulty understanding - why so many governments subsidize house owners relative to renters, whether through tax deductions of interests or otherwise.

 

Maybe the clue is that the system is not very transparent so the renters continue voting for the politicians who screw them. Another reason could be that house owners are more aware of the system so you gain more votes from house owners than you lose from renters by making an owner-friendly tax system. A third reason could be that subsidies get introduced in times when the prices are falling and there is a need to support the market to avoid a cascade of bankruptcies. And once the subsidies are introduced they are difficult to abandon without getting unpopular.

[jtfanclub]

That is something I have difficulty understanding - why so many governments subsidize house owners relative to renters, whether through tax deductions of interests or otherwise.

Because building new houses stimulates the economy, a lot more than building the same number of rental units.

 

Renters don't mind, because they want to own houses, and they believe that these subsidies make it easier for them to buy a house.

[Mbodell]

About giving up your house because the balance on the mortgage exceeds its value: I'm not so sure.

 

Suppose a guy buys a house for $500,000 and there is  a 10% drop in value These figures are pretty realistic these days. In a sense, he can save $50,000 by telling the bank to take this house and shove it. But he has to live somewhere. Even at the height (or depth maybe) of mortgage nonsense I don't think people with foreclosures on their records were finding it easy to get a new mortgage. So if he walks away from the house it seems to me that he will be renting. And maybe having trouble getting in to a decent rental place.  Further, the bank may have further claims against him if in the future he gets back in the game.

 

Mbodell, above, gives a very interesting summary of the situation but I, with no figures at all to back my opinion, am still a little skeptical that a large number of people who could pay their mortgages are just walking away because  their house has dropped in value. No doubt the amounts are an issue. If the mortgage exceeds the value by, say, $200,000 I can imagine that walking away is tempting. For 50K, it doesn't seem so rational. So a question: Is it possible to really tell who walks away because they cannot pay the mortgage and who walks away that could pay it but decides the house is not worth the payments?

joshs gave a good summary. It does depend on your location too. For instance, I'm in California. Here the majority of homes bought in the ending two years of the bubble were not owner occupied. That is they were people speculating and investing in homes. Indeed, a large chunk of the people who have been foreclosed on are speculators in California.

 

But as joshs said it is rare that these people just decide rationally that it is better to walk away, more often it is an external factor, like they can't afford the carrying cost of the property because they were supposed to flip it for $100K profit in 3 months and had not planned on having to pay the interest and property tax and what not for 15+ months (on this home and the 15 other similar ones they bought).

 

For the owner occupier the same thing will happen. Some of these people will not be able to pay the carrying costs for a variety of reasons (illness, divorce, forced relocation, job loss, interest rate adjustment, death, etc.) and will then be in the position where if they had a decent chunk of equity in their house they would sell the house and keep the equity (which may still be a loss for them since maybe they put $100K down but now only have $50K of equity, or maybe they put $100K down and now have $150K in equity but after they account for the property taxes, maintenance, insurance, realtor's 6% commission and opportunity cost they may still lose money) but since they have no equity they will go to foreclosure instead.

 

The truth is many people who will narrowly avoid foreclosure likely will have been worse off from avoiding foreclosure and would have been better off to walk away and rent. But really the only people who will be largely fine from their housing are those who entirely or nearly own their home outright (and even those folks would have been better off to have sold 18 months ago - good move phil!) and those who rent. Even if you put a responsible 20% down at the peak you're likely to end up underwater on the house. And even those people who own outright or rent and miss getting hit directly with the foreclosure mess are going to be hit from the economic fall out.

 

I also agree with the assessment that this mess will be bad for a long time. It will be bad in the US until at least 2009, and I suspect we'll have a false bump in 2009 and will actually be very bad until 2011 or 2012 (anyone who has seen the pictures of wave of loans and schedule's of adjustments will likely share these suspicions). The worst part of the build up took 8 years from 1997 through 2005 to build up and 8 years from 2005 through 2013 to unwind isn't unreasonable.

 

It will interesting to see if the Democrat who wins the white house in 2008 manages to avoid getting pinned with blame for the mess and destroyed in the ballot box in 2012 or not.

[mike777]

On a more forward looking note, how do posters expect the subprime mess to be resolved?

 

I am betting governments will not be able to stand the political pressure and inflate.

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

 

For me that means I am looking at even more broad based commodity index investing.

[Echognome]

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

As opposed to inflating through what other policy?

 

Your second sentence seems to imply that you think it will only be through monetary policy.

[mike777]

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

As opposed to inflating through what other policy?

 

Your second sentence seems to imply that you think it will only be through monetary policy.

no, I am betting fiscal policy also. In other words even more government spending deficit programs, alot more. I only mention both for clarity sake, some may not know both methods. Not everyone has a PHD as you do in economics. B)

 

I expect this to be long term trend.

[Winstonm]

On a more forward looking note,  how do posters expect the subprime mess to be resolved?

 

I am betting governments will not be able to stand the political pressure and inflate.

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

 

For me that means I am looking at even more broad based commodity index investing.

Mike,

 

I'm not so sure the government can do anything short of nationalizing the mortgage industry - even inflating won't help that much.

 

Ben Bernanke talked about this conundrum in his Jackson Hole speech - there is not a lot that the Fed can do to impact the capital markets, and as securitization has taken root as the primary mortgage lending mechanism, lowering federal funds rates do not have much impact.

 

I don't think most are aware of how serious a problem there is - way more than simply subprime loans - there is systemic risk.

 

I think you are right in that the attempt will be both monetary and fiscal policy, but we are in the throes of the unwind of a credit bubble - not a housing bubble - and the credit bubble extended into all asset classes.

[Mbodell]

The gov't gave control of the money supply and inflation to the Federal Reserve. The Federal Reserve gave control of the money supply and inflation to the equity markets and banks and Wall Street. The expression from the Japanese crunch is that the gov't can't push on a string. That is in order to have inflation you need more people lending money and borrowing money (which is why normally lower interest rates lead to inflation). But if no one is willing to borrow/lend money even with low interest rates (see the current banks not lending even to each other and hording cash in spite of the low interest rates) then attempts at inflation will fail.

 

Really, my worry is we'll have the worst of all worlds. Inflation in the price of commodities, food, energy, health care, education while wages say stagnant and home prices suffer deflation.

[kenberg]

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable. Maybe wise action will keep prices from falling through the floor.

 

But what is wise action? Governments always promise more than they can deliver. Democrats like me can supply plenty of examples involving our current president, but in the interest of harmony let me recall (I think correctly) that it was Bill who promised that by 2000 American children would be number one in the world in science and mathematics. Most of us have a portion of our brain that keeps us from standing in front of large groups of people to say things that are patently false. Successful politicians have overcome that disability.

 

I like simplicity. Start with No more zero rate credit cards, no more ARMS, no more interest only mortgages and so on. The arrange it so that if a borrower defaults you can draw a pretty short line from the person who approved the loan to the person who lost the money. Song from West Side Story: Everything free in America / For a small fee in America. This line seems to describe at least part of the problem.

[Al_U_Card]

There is tons of info on alternatives throughout the internet.

 

The point is that who gains from this financial carnage? The rich and the banks. They know in advance where the ship is headed. They can get out of the way and secure their resources in time to avoid losing everything. The little guy always pays the price. The few benefit from the loss of the many. Always has been but doesn't always have to be. Look to your own history and how financial manipulation has affected and molded your country.

 

Right from the revolution, thru the civil war and the world wars......see? It is all about wars and financial manipulation. Iraq war? Bullshit! Financial conflict? Right on!

[sceptic]

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable. Maybe wise action will keep prices from falling through the floor.

 

This is not strictly true at the point of purchase, at the point of purchase people brought something they could not afford if there was a fluctuation in the market place. greedy bastards never fully explained this to them (nor did they care as long as they were getting their commisions) the sales people were quite possibly unscrupulous as are the lending institutions

 

I think they deserve to suffer not the poor mug they tricked into a loan, they knew they could not afford if things went a bit skew wiff

 

Greed is at fault and the solution sadly is left to the politicians who get their advice from economists that just manipulate figures to do what ever they please, I think it is quite feasable that you can pay an economist to produce figures supporting any view point you like

 

No one has the BALLS to sort the market out because if they did, there would not be so much credit available and that is possibly the reason that no one bothered to sort it out prior to this very foreseeable event

 

This is just my humble opinion for whats it is worth